Discount Rate (SAFEs and Notes)

The discount rate is a term in SAFEs and convertible notes that gives early investors a guaranteed percentage discount on the share price of your next funding round. If a note has a 20% discount, the investor converts at 80% of whatever price per share the Series A investors pay. It's a straightforward reward for investing early.

Discount rates typically range from 10% to 25%, with 20% being the most common. A SAFE or note can have a discount, a valuation cap, or both. When both exist, the investor gets whichever gives them a lower (better) price per share at conversion. In practice, if the valuation cap is set appropriately, it usually provides a better deal than the discount — but the discount serves as a floor benefit in case the next round's valuation comes in lower than expected.

Some instruments, especially YC's standard post-money SAFE, don't include a discount at all — just a valuation cap. The trend has been toward simpler terms, and many investors find that a cap alone is sufficient. However, you'll still encounter discounts frequently in convertible notes and in negotiations with investors who want both protections.

Understanding discount rates helps you calculate the true cost of early-stage capital. A 20% discount means your early investors are effectively buying equity at a 20% lower price than your Series A investors — which translates to about 25% more shares for the same money. When combined with a valuation cap, the investor gets whichever is more favorable, so you need to model both scenarios to know your actual dilution. Failing to account for the discount can lead to surprises on your cap table when the notes convert.